Long ago a secret war raged between Heaven and Hell, each using humanity as its pawns. While the Prime Evils of Hell were engaged in war their lesser lieutenants conspired to overthrow them. They mutinied suddenly with the combined forces of Hell, overwhelming the three Primes. Stripped of their power, they were banished to the mortal realm. Human agents of Heaven, upon discovering this, found the three Primes and sealed them within gemstone prisons, each of them sent to a different corner of the earth and kept under guard to prevent them from escaping.

As years turns to centuries, however, the power of Heaven's agents waned, until eventually not even the people of the town of Tristram knew that buried deep under their chapel was the soul of the Lord of Terror, Diablo. As the strength of his prison waned Diablo reached out into the world, corrupting the dreams of the land's good king, driving him to attack his neighbors. The nation of Khanduras fought wars with no intention of winning, desiring only slaughter and suffering. Now the lands lay scorched, home only to monsters and the dead. Rumors spread of a way to stop the demons, as well as rumors of great wealth, and both draw adventurers from far to the small town of Tristram.

Players start by choosing their avatar's class: either Warrior, Rogue, or Sorcerer. Warriors have the highest maximum strength and can repair weapons and armor inside the dungeon, but this will lower the item's maximum durability. The Rogue has the highest maximum dexterity and can both see and disarm traps on treasure chests. The Sorcerer has the highest maximum magic attribute and can recharge the charges on a spellcasting staff at the cost of his own mana.

Characters can equip armor, weapons, and accessories found in the chapel's shifting dungeons, but strong equipment will have minimum attribute requirements to be worn. Most equipment will have randomized stats, but some strong monsters will drop Unique weapons with set stats. Magic can be learned by finding magic tomes, and leveled up by finding multiples of the same spell tome, but advanced spell levels can not be learned if the character's magic stat is too low. Upon destroying enough monsters to level up the player is rewarded with additional attribute points to distribute to whichever attributes they wish. Occasionally the few people left in town will inform the player of a job they would like done, either an exceptionally strong monster that must be slain or a unique item found deep in the dungeon, and will reward the player in kind upon completion of the quest.

Diablo can be played cooperatively with 1 to 3 other players over LAN or BattleNet with the PC versions, or with 1 player locally on the PlayStation. Players can team up to survive the depths of the dungeons, or turn on each other to steal one another's items from their corpse. The quest unique zones are removed from the online version of a dungeon, and instead quest monsters will be found wandering the level that would normally lead to their unique area.